Enterprise Server Segment Takes a Beating

The latest data from Gartner Inc. and IDC paints a dismal picture of IT spending in general and the server market in particular. Both market watchers see server sales plummeting -- even as IDC revised its global IT spending forecast (yet again) down to 0.5 percent growth.

According to Gartner, Q4 server unit shipments dipped by double digits, plunging 11.7 percent from their year-ago total; server revenues plummeted by 15.1 percent on a year-over-year basis. IDC's numbers tell a largely similar story, with global unit shipments of servers down by a near-identical 12.0 percent and server revenues off by 14 percent.

"The weakening economic environment had a deep impact on server market revenues in the fourth quarter as companies put a hold on spending across most market segments," said Heeral Kota, senior research analyst at Gartner, in a statement.

IDC, for its part, doesn't expect a rebound until late 2009 at the earliest. "It now appears the slowdown will worsen before any improvement is seen in late 2009 or early 2010," said Matthew Eastwood, group vice-president of IDC's Enterprise Platform Group, in a prepared release. "In the near term, IT customers will increasingly look for IT optimization projects with strong ROI potential and extend virtualization, consolidation, and migration programs in order to lower capital and operational costs while improving efficiencies."

The server market was battered at almost every level, although the volume segment had an especially rough Q4, both market watchers conclude. IDC, for example, cited a near-17 percent year-over-year decline in volume system sales, while demand for midrange servers fell off by 14.5 percent.

Even the high-end segment -- the domain of resurgent mainframe systems and stalwart Unix servers -- was down, dropping by 7.5 percent year-over year. (The high-end server space had been a reliable catalyst for revenue growth -- especially for IBM Corp. -- in previous market tallies.) It's the first time since 2002 -- an especially bleak period -- that all three segments posted declines in the same quarter, according to IDC.

Both IDC and Gartner found that sales of blade servers posted positive growth -- albeit at a slower rate than in the past. "Almost all segments exhibited similar behavior as users sought to reduce costs and spending, deferring projects where possible," Kota said. "Blade servers were one of the few segments to achieve any growth at all in this challenging environment," Kota continued, citing 30 percent growth in both revenues and unit shipments. IDC isn't as sanguine about blades: it has sales increasing by 16.1 percent and unit shipments growing by just 12.1 percent year over year.

Paradoxically, the mainframe wasn't battered as hard in Q4 of 2008. Gartner flagged System z sales as "the only area of IBM's business to grow year-on-year" -- although System z's performance wasn't enough to offset declines in other server segments. IBM's overall server market revenues dropped by 17.4 percent. (Big Blue posted a staggering 22.3 percent drop in unit shipments -- an indication of just how much big-ticket System z sales helped sustain its flagging server revenues.)

Runner-up Hewlett-Packard Co. (HP) also posted a double-digit decline in revenue -- HP's server sales were off by 10 percent -- even though its unit shipments dropped by only 1.6 percent.

Elsewhere, IDC reports that Unix server sales -- which had been consistently sloughing off in surveys past -- actually appear to be holding steady.

"While Unix server revenue declined in the fourth quarter, Unix server share of 36 percent of quarterly server-market revenue compares well with the year-ago quarter, when Unix server revenue accounted for 33 percent of quarterly revenue," said IDC research vice-president Jean Bozman, in a release.

On the other hand, Bozman says, Unix server sales were also slightly off in the last 12 months, at $4.9 billion in Q4 of 2008 versus $5.2 billion in the fourth quarter of 2007. "[T]he share of total revenue shows continued investment in Unix servers, where customers have invested so deeply over the years to support mission-critical workloads."

IDC also recently revised its IT spending forecast -- downward, as expected -- with especially steep declines in the U.S., where it forecasts year-over-year "growth" of 0.1% in IT spending. (By contrast, IDC's U.S. market forecast predicted 0.9 percent growth in November of 2008.) Global IT spending is projected to grow by just 0.5 percent, according to IDC -- a significant drop from the 2.6 percent that IDC tallied in November of last year. For 2009, IDC projects an especially sharp decline in hardware sales -- with spending plunging by 7.4 percent -- as well as modest growth in both software and IT services spending.

"Fourth quarter data from a number of key markets and geographies clearly show that companies have been very quick to pull back their spending," said John Gantz, chief research officer at IDC, in a prepared release. "The data also provide a clearer picture of how companies are curbing their expenditures. Investments in software and services are being maintained in pursuit of productivity and efficiency gains while hardware spending is being slashed in an attempt to stretch refresh cycles and squeeze more out of existing assets."